Will leverage and pricing power drive Netflix to a record high?

The Netflix Inc. NASDAQ: NFLX narrative is not without risk. The company struggled with growth following the COVID-19 bubble, but those days are behind. The story today is leverage, driven by expanding member count, higher prices and ad sales expected to continue in 2024. 

The stock growth is undervalued, given the trajectory for sustained, double-digit top-line growth and margin expansion, and it could reach an all-time high this year. 

Netflix stock trades at only 30 times its 2024 analyst consensus earnings estimate, which is low for a high-quality, industry-leading consumer tech with a growth and margin outlook such as this. The value falls below 25x relative to next year and only 20x for 2026, with future estimates likely low due to momentum in the core business. In this regard, Netflix may see a price-multiple expansion accelerate the stock price rally this year. 

Analysts lead Netflix higher; expect this trend to continue

The trend in analyst sentiment and price targets are in sync with the outlook for higher share prices if not a price-multiple expansion; the consensus sentiment of 32 analysts tracked by MarketBeat is up to "moderate buy" from "hold" in the last 12 months, and the price target is rising. 

The only negative is that the consensus target implies fair value with the stock at $495, which may present a headwind. However, the analysts' activity in January 2024 leading into the report is suggestive. The nine releases tracked by Marketbeat include two downgrades to "hold" with price targets above the consensus, an initiated coverage with a price target in the highest quartile of the analysts' range, and four boosted targets with an average price 20% above the pre-release action. Because the Q4 results and guidance are so robust, the trend in sentiment should continue to lead this market higher. 

Netflix has a mixed quarter with non-cash impairments hitting the bottom line

Netflix had a solid Q4, well above consensus, despite the bottom line falling short of the target. The top-line growth came in at 12% to beat the consensus, impacted by non-cash impairments that left the bottom line short. Regardless, the top-line strength is driven by paid-sharing, price increases and the core business, which continues to expand. Regarding paid memberships, global membership grew nearly 13% and should remain solid in 2024.

During the quarter, the company experienced some deleveraging due to FX headwinds and European asset valuations but did not raise a red flag for the market. The GAAP $2.11 is 11 cents below the consensus but offset by the full-year tally and the outlook for the next fiscal year. The full-year margin expanded to 21%, 100 basis points above target, with strength forecast for Q1 2024. 

The company's revenue guidance aligns with the analysts' expectations; the earnings guidance is well above. Strength is expected due to increased leverage attributed to a growing subscriber base and higher prices. The core business drivers will be the content line-up, live events and increasing third-party content producers licensing their material to Netflix.

A $5 billion partnership with TKO Group for WWE Raw is among the many deals expected to drive growth. The deal brings WWE exclusively to Netflix for 10 years starting in 2025. Because WWE brought in over $1 billion in revenue in 2023, it looks like a good move for Netflix. The deal included bringing Dwayne Johnson to the TKO board. 

The technical outlook: Netflix surges, more to come

Netflix stock was in rally mode going into the Q4 release and is confirming the trend now. The stock is up 10%, showing support at a critical level, with analysts raising their price targets. The market may experience some volatility over the next few months or quarters but looks set to move up to the $600 range. Assuming the company produces similarly strong results in Q1, a new all-time high could be reached in the first of 2024.